Exar's (EXAR) CEO Louis DiNardo on Q1 2015 Results - Earnings Call Transcript

Aug. 7.14 | About: Exar Corporation (EXAR)

Exar (NYSE:EXAR)

Q1 2015 Earnings Call

August 06, 2014 4:45 pm ET

Executives

Louis DiNardo - Chief Executive Officer, President and Director

Ryan A. Benton - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Parviz Ghaffaripour - Senior Vice President and General Manager of Component Products

Craig Lytle - Senior Vice President of System Solutions Products

Analysts

Tore Svanberg - Stifel, Nicolaus & Company, Incorporated, Research Division

Timothy M. Arcuri - Cowen and Company, LLC, Research Division

Craig A. Ellis - B. Riley Caris, Research Division

Jonathan Tanwanteng - CJS Securities, Inc.

Dan K. Scovel - Edison Investment Research Limited

Operator

Well, ladies and gentlemen, thank you for standing by, and welcome to Exar Corporation's Fiscal Year 2015 First Quarter Financial Results Conference Call. [Operator Instructions] In addition, today's conference call is being recorded. I will now turn the conference over to Exar's President and CEO, Louis DiNardo. Please go ahead, sir.

Louis DiNardo

Good afternoon, everyone. Thanks for joining us on the Exar Corp. Fiscal 2015 First Quarter Financial Results Conference Call. With me today is Ryan Benton, our CFO; and with me today also is Parviz Ghaffaripour, Senior Vice President and General Manager of our Component Products; and Craig Lytle, Senior Vice President and General Manager of our Systems Products. At this time, I'll turn the call over to Ryan to present the quarterly results. Go ahead, Ryan.

Ryan A. Benton

Thanks, Lou. Please note that the fiscal 2015 first quarter results were published this afternoon after the market closed and can be viewed on our website. After my prepared remarks, we will be presenting from a live webcast. You can view the live webcast on the company's website at ir.exar.com.

The company reports financial results in accordance with GAAP. However, we are disclosing various non-GAAP measures. The company believes that non-GAAP measures are useful to the performance of financial analysis. The reconciliation from non-GAAP to GAAP financials discussed today can be found in today's release and company's applicable SEC filings, unless otherwise stated, when speaking of operating results, the company is referring to non-GAAP results.

And lastly, during the course of this conference call, we will be making forward-looking statements that involve a number of risks and uncertainties and are not guarantees of future performance. You are encouraged to review the Safe Harbor statement contained in today's press release, as well as the other risks detailed from time to time in the company's SEC filings.

Before I begin the deluge of data, a comment on the acquisition of Integrated Memory Logic Limited or iML. As many of you know, in April, we launched a public tender offering with the goal to acquire all the outstanding shares of iML. On June 3, we successfully closed the tender and acquired 92% of the outstanding shares for approximately $73 million net of cash acquired. Thus, on June 4, we began consolidating iML into our results. In the near future, we expect to acquire the remaining outstanding 8% of iML shares for an additional $18 million.

Lastly, let me add that after working side-by-side with them on a daily basis, I can't say enough about how much we have come to respect the achievement of the iML team in building a fantastic business with great customers, products and technology.

Now for the results. Non-GAAP revenue for the first quarter of fiscal 2015 was $32.6 million, an increase of 17% from the $28 million in the prior quarter. Non-GAAP revenue was $1.9 million higher than the GAAP revenue, as GAAP eliminates deferred revenue on sell-through products in the distribution channel on the date of acquisition. As we look at sales by end market, industrial accounted for 58% of the first quarter sales. In Q1, industrial sales of $18.9 million declined 4% when compared to the $19.6 million reported last quarter. Note that the iML acquisition -- note that with the iML acquisition, the high-end Consumer market now becomes one of strategic importance for us. As such, this quarter, we began classifying sales for certain products such as set-top boxes, as high-end Consumer, which are sold to an industrial -- which are sold through an industrial partner and were previously reported on their industrial.

High-end Consumer was $5.3 million for the first quarter or to 16% of sales, a substantial increase over the previous quarter, which was de minimis.

Networking sales for the first quarter were $3.3 million or 10% of sales, consistent with last quarter. And communication sales at $5.1 million or 16% of sales were flat sequentially.

On a non-GAAP basis, first quarter gross margin was 48.2%, 235 basis points higher sequentially. This equates to a gross profit of $15.7 million for the first quarter, compared with $12.8 million last quarter. Gross margin improved sequentially as a result of improved mix with the inclusion of the new display product line.

First quarter non-GAAP operating expenses were $15 million, compared with $12.7 million reported in the fourth quarter. These non-GAAP amounts excludes certain charges such as stock-based compensation, the amortization and impairment of acquired intangibles, M&A cost, restructuring charges and changes in the fair value of contingent consideration.

By expense category, first quarter non-GAAP R&D expenses were $7.4 million, compared with $6.2 million reported in the fourth quarter and non-GAAP SG&A expenses were $7.6 million, compared with the $6.4 million reported in the fourth quarter. These increases were as a result of the inclusion of iML expenses, as well as the credit for variable compensation expense in the previous quarter.

Non-GAAP operating income for the first quarter were $692,000, compared with $166,000 reported in the fourth quarter. First quarter non-GAAP net income was $866 -- $860,000 compared with $676,000 for the fourth quarter. We expect significant leverage in the coming quarters with the inclusion of iML and attraction of new products from both Exar proper and iML product line.

First quarter non-GAAP earnings per fully diluted share was $0.02, compared with $0.01 reported last quarter. The number of shares used in the first quarter calculation of non-GAAP results decreased to 49.8 million shares, down from 50.2 million. In the first quarter, we repurchased 273,000 shares of stock as part of our buyback program. On a GAAP basis, first quarter gross margin was 35.7% compared with the fourth quarter gross margin of 30.1%. GAAP operating expenses for the first quarter were $22.3 million compared with $8.7 million reported last quarter.

This quarter's results include substantial charges associated with the acquisition of iML, increased purchase amortization and credits recorded last quarter. First quarter GAAP net loss was $12.1 million, compared with GAAP net income of $147,000 reported in the fourth quarter. These results translate to a GAAP loss per share for the first quarter of $0.26.

Turning to the balance sheet. First quarter accounts receivable increased to $29.1 million from $18.3 million in the fourth quarter. All but $700,000 of this increase was attributable to purchase accounting of iML. Based upon the midpoint of our guidance, the next quarter, which would fully account for iML, DSO would translate to approximately 64 days. Net inventory increased to $32 million, compared with $29 million last quarter. We acquired $4 million in inventory associated with the iML acquisition. Based upon the midpoint of our guidance for next quarter, days inventory would translate to approximately 125 days.

Now a few cash flow measures. In the first quarter, total depreciation and amortization were $3.3 million, of which $1.6 million was included in the non-GAAP results. This translates to a non-GAAP EBITDA of $2.2 million for the first quarter, making this the 9th consecutive positive quarter. For working capital, we ended the first quarter with $149 million in cash and short-term investments, or $84 million net of the $65 million short-term bridge facility used to finance the iML tender.

As of the end of July, the entire balance of this facility has been repaid, $39 million in cash and $26 million by a low-cost replacement facility, which will itself be repaid upon completion of the second debt merger.

Cash was impacted by the payment of acquisition-related fees, as well as the $3 million paid toward the share buyback program. That ends my prepared remarks. And I'll now turn it over to Louis.

Louis DiNardo

Thank you, Ryan. Okay, folks, well, as has become usual, I'm going to talk to a slide deck, which if you're taking the time in going to our website, and I think it's at ir.exar.com. You'll be able to step through this with me. I'm going to try to keep this short. I had a bunch of my good friends on the call who last quarter told me I spoke too long, so I'm going to keep the deck short and I'm going to skip over a few slides, which are really primarily there so the people who log on after the call, maybe didn't listen, will have an opportunity to just kind of fill in some of the blanks.

So we I'm going to skip past the Safe Harbor statement. Again, it's here for those who will look at it online. Ryan there's already directed you to go to the Safe Harbor statement before his prepared remarks. The background slide, this is the slide we've kept in our investor deck since the day I got here, back in January of 2012. It was 2012 or 2013? It was 2012. The company was founded in 1971. None of these things have changed, headquartered in Fremont, California. We do now have engineering centers in more places. Of course, here in Silicon Valley; at our Fremont headquarters; Hangzhou, China; Wuxi, China; Loveland, Colorado; Eatontown, New Jersey; and now, Hsin-Chu, Taiwan; and Seoul, South Korea. The combination of the 2 companies brings us to a headcount of about 401 or 402 people. Revenue, on a trailing basis, if you pro forma in iML's last full year and our last full fiscal year, $192 million. So what we accomplished here with this acquisition was getting the scale that we desired so we can leverage vendors, we have more diversity, all of those things that allow us to be more resilient, a little bit more insulated -- or isolated from wild swings in any particular market and just generally have more bulks so that we don't suffer the bane of small numbers.

Balance sheet. Net cash after the deal, $65 million. And I put in here for the first time, our market capitalization and our enterprise value, and this was just taken off to Yahoo! so you see it's an approximate number, $450 million in market cap and $386 million in enterprise value. I can tell you that I think given the multiples that we're now down to, we certainly see this as a strong value for shareholders and we're certainly leveraging our buyback plan given where the stock price has been.

You move to the next slide. This will give you sense of $192 million this company playing at scale and how we really line up by end market, as well as by geography. You can see the diversity that we've achieved here by end market, industrial at about 38%, the high-end Consumer Business at about 35%, Communications Infrastructure around 11%, and the balance is 16% in Networking & Storage. And if you look at it by geography, we've increased our presence or our footprint in Asia. I think that number if we were standalone was around 60%, and now we're sitting at 72%. And you can see the Americas at 20% and Europe at 8%. In aggregate terms, I still think that we're light or weak in Europe, we're doing a lot to improve our sales force there or our sales presence there and I expect that to come up as a percentage of sales, as we look out over the next few quarters.

The next slide really tries to distill or stew down. I don't know if you can get to the next slide on the presentation, here it goes. I'm trying not to get ahead of the slides. I think there's been lots of questions as we talk to investors when we go out on, on the nondeal roadshows or we're at conferences, or we have one-on-ones, or even on these calls. When you step back, it's really a relatively simple plan that we have here. It seems complex, if you don't really dig into it. But we focus on 2 things, analog mixed-signal and system solutions and the software that's required to go with it. We have really what looks like 6 or 7 major product lines in the analog mixed-signal space. And I could tell you that compares to 10s of product lines or more when you look at some of the larger companies. Our peer group or even companies, which now we're approaching the size of. We do Power Management and we do a variety of different power management things. We do PMICs that go into displays. We do PMICs that are universal and can be used in the industrial space or most markets for that matter. We do bridges, in some cases, their UARTs, in some cases, there are bridges that have dedicated protocols. Ethernet to USB, for example -- excuse me, USB to Ethernet.

Transceivers, we've been doing for a long time, RS-232, RS45, that's either Single-Ended or differential. In the transceiver space, I think one of our fortes is also multiprotocol where we have a lot of proprietary product. And it just has multiple protocols on a single IC. Amplifiers have a wide variety. I just lumping together these amplifiers here, but with iML, we've picked up VCOM or common mode voltage amplifiers. We have -- with our high-performance analog group that came in with the Cadeka acquisition, we do instrumentation amplifiers, we do high-speed amplifiers, we do rail-to-rail amplifiers, just that whole swath of precision amplifiers that you could compare to a product line like analog devices linear technology or others in the high-performance analog space. We do data converters, analog to digital and digital to analog display drivers. We introduced our first Timing product this past quarter. And it's an area where we think we really have a major differentiation and that we can program our timing solution and really have the single IC that can drop into a wide variety of competitive sockets.

Display drivers again, coming along with the iML acquisition and -- one area that I'm going to spend a little bit more time on later on is LED lighting. I know there's lots of question about why get into a market that seems so competitive. And I think you're going to see in the coming slide, a dramatic differentiation and value proposition for a wide range of LED lighting applications.

In the system solutions part of our business, I think everybody knows, it's Data Compression and Encryption, Panther I and Panther II, are things that were invented here. We now have introduced dedicated Hadoop solutions, as well as Data Warehouse solutions. So Ultra HD for the Hadoop world and Ultra store for the Data Warehouse and cloud [ph] .

Video processing, which came along with the Stretch acquisition, its processing and transmission, we have talked publicly about our goal to get into the composite video interface or it's what's going to be known as CVI. So really relatively straightforward play when you think about it. So lots of development going on internally and I'll just touch briefly on new products in a minute.

Market focus is now, as you can see, industrial, networking, comm, and high-end Consumer, that diversity that just gives us another leg of the stool to give us stability.

We'll go to the next slide. And I'm not going to read through this slide. This will really be here for folks who want to catch up with us later, or who want to review the presentation online. When you look at the last 18 months, and then actually looking back 15 months, and rolling into this quarter, with our forecast for new product introductions, with the aggregation of Stretch, Cadeka, Altera, Exar proper and now iML, we've introduced over 60 new products in the last 18 months, or the last 15 months plus the coming 5 months -- coming 3 months period.

Again, Strech is from Power Management through bridges, I'm not going to read this slide.

Next slide. I think this is one of the most impressive new developments that's coming out of iML. iML is an 18-year-old company, great work for us, highly centered around engineering resources, traditionally in flat-panel displays, large flat-panel displays, migrating into tablets, great presence in building momentum with our PMICs in the tablet world. And certainly it's maintaining the strong leadership position in market share, in flat-panel displays. The company acquired an asset a few years ago and has built out a family of LED lighting solutions. I'm just going to compare a side-to-side here. If you look on the left-hand side, you can see what the standard AC/DC solution looks like. It's got 2 circuit boards, 1 in the base of the bulb, the AC/DC conversion, and then the circuit board that sits up closer to the lens, which really has light-emitting diodes. You can see the complexity of the bulb, you can see the potential for failures in a wide variety of ways. If you scan down slightly on the page, you'll see the bill of materials, which includes an inductor, it includes electrolytic capacitors, it includes lots of things that are known failure modes. There's another slide which I didn't bother to put in this deck, which talks about the percentage of failures that has nothing to do with the LEDs, when you're using an AC/DC converter solution. There's just so much going on. There's so much room for potential failure and you can see because of the complexity of the BOM costs, and these are estimates that are just taken of the public data. The BOM cost sits at about $1.00 to put this bulb together.

Excuse me, with just the electronics that we're talking about.

Now if you look over to the right side of the page, you'll see iML has an AC Step Driver solution. You could see, eliminate an entire PC board. You eliminate the AC/DC converter. Therefore, you're eliminating the electrolytic capacitors, you're eliminating the transformer. If you scan down the bottom of the page, you can see the BOM cost at roughly about $0.44. So it's a dramatic reduction in BOM cost, it's a dramatic reduction in complexity and with the reduction in complexity comes an improvement in reliability.

The company has been shipping products and has just recently got its first large volume orders. So we're really excited about what's going on in LED lighting. I know it's perceived as a very competitive marketplace. It's extremely high volume. We've got a wonderful solution. We can compete on flicker, we can compete on dimming, and we certainly have a better mousetrap when it comes to lack of complexity and in improvement in reliability.

Go to the next slide, and I'll be done in just a moment here. We're just going to start talk about the numbers a little bit. Let's just some perspective where we are and I'll point out that the 2 bars to the right, the far right, are not the 2 coming quarters. We only forecast or provide guidance on a coming quarter. This is low end of our guidance range. And the high end of our guidance range. In either case, you can see the dramatic step up from the current quarter and you can see that -- with that, there'll be a lot of leverage that will be shown on the next slide. So this just shows you back in time. You could certainly see the rough quarter we had in that fourth quarter of '14. You could see the bounce back in the first quarter of '15 and really what will be a significant improvement again getting greater scale even, as we speak.

Go to the next slide, which I believe is the last slide. Again this is a slide you guys have seen, or folks have seen, many times. We call it our target financial model. And I've tried to simplify it this time. We're just going to bring your attention over to the last 2 columns. The last -- second to the last column is our actual Q2 guidance. Actually, then maybe the last 3 columns, you could just walk down and you could see the Q1 results, $32.6 million, $15.7 million in gross profit, 48% gross margin, with $15 million in operating expenses, we turned about $700,000 of operating income, with the net income with just incremental to it. We turned $0.02 of EPS. As we look forward to Q2, $40 million to $43 million as the top line. Gross profit should be in the range of 47% to 50%, that will get you something on the order of $19 million to $22 million, and these are in rounded numbers. $19 million to $22 million in gross profit with spending well under control at $18 million to $19 million, we'll see something on the order of a $1 million to $3 million as a range of operating income as an outcome and that will get us something in the range of $0.02 to $0.06 per fully diluted share.

Last thing I'll touch on is, now we've had this target model out there. We're still well on our path to the Exar proper part of the business achieving what was our part of this model, and now we've layered on top of that significant growth out of iML as well. So our goal here, it's called the medium-term horizon, and I know everybody will ask me what that means. It's -- we're certainly looking at there about 18 months. We've got something that looks like $70 million as our target, $37 million in gross profit, which will be a 53% gross margin.

Operating expenses, I think everyone recognizes that this is a team both ourselves, and maybe even more so, the iML team really control expenses well. That would give us operating income of $15 million for the quarter, or EPS of $0.31. That's what our aspirations are. I think with that, presentation is over. And Ryan and myself, as well as Craig or Parviz we'll -- happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Tore Svanberg with Stifel.

Tore Svanberg - Stifel, Nicolaus & Company, Incorporated, Research Division

A few questions. Maybe first of all, Ryan, can you talk a little bit more about this accounting change you had with deferred revenue. And does that impact at all what the core Exar business would have done in the September quarter. I'm just trying to understand if there's a pulling of revenue here from September?

Ryan A. Benton

No. This is really related to the iML purchase accounting. So iML had deferred revenue sitting on the books at the date of the acquisition. And the way the business combination accounting works, you essentially fair value that, and because there's very little left that iML has to do to recognize that revenue, essentially gets taken off the balance sheet. So it's revenue that, on a standalone basis, they would have recognized. So $1.9 million sold through in the month of June and a couple hundred thousand additional that sold through in July, that they would have recorded. However, on a GAAP basis, on a combined consolidated Exar basis, we don't recognize that revenue. So we show it on a pro forma basis, so you really have a better sense of what the operational sell through is.

Louis DiNardo

And Tore, on those that -- Ryan has shown me this on the whiteboard half a dozen times and again my mind around it, but what he did in order to kind of figure out how we should present this, so that you could really see what the combined entity would have achieved was he went to prices like Intel, who does exactly the same thing with exactly the -- virtually, exactly the same language in your press release as well as Microchip.

Tore Svanberg - Stifel, Nicolaus & Company, Incorporated, Research Division

So looking at the iML business going forward, I think historically, it's been sort of running at $15 million, $16 million a quarter. Is that sort of the run rate we should expect near term and then maybe an acceleration from that later on?

Louis DiNardo

I have to say, Tore, at this point, iML, we're a 92% owner and we're going to close this thing very shortly. So we won't be forecasting, and we don't present numbers by product lines. iML will be part of our consumer, high-end Consumer business. It's a company that's had a history of achieving those kinds of numbers, there's some business that was coming with some business that was going. But we're nothing -- we're not going to forecast iML as a discrete entity.

Tore Svanberg - Stifel, Nicolaus & Company, Incorporated, Research Division

Fair enough. You also changed the composition of industrial, meaning, you took set-top box out. If we sort of address for that, is it fair to say that industrial would have still been flattish sequentially?

Louis DiNardo

Yes, that's about right. And I know where everybody is trying to get here is where -- what are the Exar business look like for the quarter. If you could parse out, if we were reporting numbers by product line, and I think it's fair to say that we're well within the range of our guidance. And that just gets you to a place where you should have comfort that we're back on an Exar growth trajectory and expansion. We're not going to report by product line, we're not going to break iML out separately, but I do think that it's fair given that this was a stub of revenue that came in for the quarter and there is a whole bunch of accounting machinations that had to go with it. And I think it's fair for me to comment that we were well within the range of our guidance.

Tore Svanberg - Stifel, Nicolaus & Company, Incorporated, Research Division

Sounds good. And I noticed your storage business was flat sequentially. Is that a sign that, that business is now sort of completed its correction and that you actually start to see growth again in the data compression business going forward?

Louis DiNardo

I'd say, while I expect that we'll see growth in networking generally, we have not burned off all the inventory. On the other hand, we have new design activities, which some will be short term and some will be longer term, which are going to add really nice step ups in the -- let's call it networking, as we're talking about, and markets. So I guess, that's yes, and a no, all at the same time. We do expect to return to growth in that business, not necessarily on the back of the customer concentration that we were disappointed by last year. But more on the back of an expansion of our account base.

Tore Svanberg - Stifel, Nicolaus & Company, Incorporated, Research Division

Very good. Last question. I think you've guided OpEx to be up to $19 million to $20 million in the September quarter, yet Lou, when you were going through your remarks, I thought you said something like $18 million to $19 million run rate. So should we expect September to be a peak and then yes, we'll start to see some lower numbers after that?

Louis DiNardo

Yes. That's probably fair. There are natural synergies that come along with an integration, as public company expenses. We don't have 2 sets of Boards that have to be paid. We don't have 2 sets of auditors that have to be paid, 2 sets of lawyers that have to be paid. I think know you how painful all those invoices can be. So there are some natural synergies which will help us bring that number in line.

Operator

And we'll now hear from Tim Arcuri with Cowen and Company.

Timothy M. Arcuri - Cowen and Company, LLC, Research Division

A couple of things. Lou, I know you don't want to break out iML, but if you just assume that it's doing like $15 million per quarter, which you guys were talking about that sort of a number when you bought them. The guidance for September is for the core business to be down, for the core Exar business to be down. Even if you assume that iML did 3.5, 4 per your comments, that you're going to be within your guidance. So why would the core business be down sequentially in September, net iML or is it in fact that iML just as not going to get to that sort of historical quarterly run rate?

Louis DiNardo

Yes, I think there's an assumption in there about iML which you shouldn't make. We're being selective about business. They were being selective about business. There was, I think, a reasonably well-known public issue with 1 large customer in the state of California, in the computing business, which is a piece of business that kind of came and went. So we're still burning, earning off through that. I think what's maybe more important is, we're taking an opportunity to step back and look conservatively at our business. We have an opportunity here, and I've shared this with all you folks before, there's a business that we just don't like. We take it because it helped maintain bulk and scale, the scale that we had, as a $30 million company. But there's a transceiver business that we don't want. There's a low-end Power Management business that we don't want. It's barely, if at all, in many cases, not adding to our operating income. So we're leaving ourselves the breathing room to make some good choices during the next quarter or 2. We're achieving great scale, if we do 40 to 43, and I know what most you will do split the goalpost and come in somewhere in the middle of the range. That gives us the breathing room to really digest and understand what the steady-state business is with the iML products, as well as what the traction is with respect to mass production, real mass production on the lighting business, and more importantly, for us to really take an opportunity to do a little portfolio management internally ourselves. I think you'd see -- in that context, what you'd see is an expansion in gross margin. You'd see no hit to operating income or EPS. What you'd see is a better mix given that would have achieved meaningful scale, then it's a good time for us to at least evaluate those decisions.

Timothy M. Arcuri - Cowen and Company, LLC, Research Division

Okay. Thanks. Then, I guess, I have a question on the Networking & Storage business. I think the expectation was for the end of June that the inventory would be gone by the end of June. And maybe, we would see a little bit of a snap in June. I think the implication was that maybe that business would be up $1 million or so, something like that in June. It turns out to be flat again. So is it just literally like, is it a demand problem, i.e., that the demand for the product is soft? Or is it a bigger issue that could prolong that we should just assume that this is flat really until the new design activity begins to kick in toward the end of the year, the end of the first half of next year?

Louis DiNardo

I think the conservative approach would be the latter. It's very difficult for us to comment, particularly when there's customer concentration, it's very difficult for me to comment on specifics about a customer or 2 customers here or there. I think the benefit we have, even within that concentrated customer base, but more importantly, outside of that account base, what we found is a very warm reception for those that are doing the Hadoop solution. The pieces that many have put forth your own colleagues that's covered the networking space with the storage space, the thesis has been that Hadoop is starting to eat the lunch of the traditional data warehouse. At this point, that might play to our favor. We have extremely large accounts we're engaged with on the size or larger than those that we have the concentrated effort with Panther I and the data warehousing space. So I think there's a lot of things going on out there. Well, I think we're well-positioned with our existing account base. Their business gets healthy, we'll get healthy with them. But more importantly, as there's a paradigm shifts towards the call MapReduce environment, we're being in the right place at the right time.

Timothy M. Arcuri - Cowen and Company, LLC, Research Division

Okay, great. And then just one more thing for me. Ryan, given all the moving parts in cash, can you give us maybe just a little bit of guidance in terms of what you think net can -- well, gross and net cash will be, exiting September. And also, if you can comment on inventory whether that sort of peaked out and now it should keep on coming down?

Ryan A. Benton

Yes. So cash ending the quarter September, I'm going to assign a pretty broad range and say between $50 million and $60 million. And that will be gross and net. So again, the bridge that we put in place in order to find some tenders then completely pay it off, we have 26 -- as of today, we have $26 million sitting on replacement low cost bridge and my expectation is that by the end of September, we will complete the second step merger process and we'll pay off that $26 million bridge. So gross and net will be the same thing.

Louis DiNardo

On your inventory question. I think there's going to be a bit of a balance. I think there's, and I guess, this is more about the business, and you can talk about the numbers. If we're selective, if we have the opportunity to be selective, we're going to burn off some of our own inventory. I think Exar's inventory needs to come down. There's no question in my mind that we've got a process in place to force that to happen. At the same time, iML was an extremely lean company, $4 million of inventory, whether it's supporting go forward $12 million, $13 million or $15 million or $16 million, somewhere in that range. That's an awful lot of turns and when you get customers that are as discriminating as, and these are customers we can easily talk about, everybody knows who the big TV manufacturers are and the tablet manufacturers. And you're dealing with companies like Samsung and LG, and AOU, and BOE, you got to have enough product to feed the beasts. So I think we'll probably get a bump in inventory on the iML side and tear down some inventory on the Exar side.

Ryan A. Benton

It's a small detail, but the $4 million is the GAAP number post purchase accounting. So the really prepurchase accounting numbers is about $2.5 million and then there's the step up in basis of about $1.5 million which amortizes down. So they were certainly extremely lean in terms of inventory.

Operator

[Operator Instructions] And we'll move on to Craig Ellis with B.Riley.

Craig A. Ellis - B. Riley Caris, Research Division

First, just wanted to clarify a few things in the reported quarter, in the fiscal fourth quarter, there were a couple of issues that hurt you, some defense business that slipped and then I think some software, did that come into the model in the June quarter?

Louis DiNardo

In the June quarter, the quarter we just completed. Software, in a meaningful way did, defense has not. Although, I think we have a clear line of sight now, there's been a couple of public announcements and one in particular about Qatar, so the projects needed to be let have been let. Now it's just percolating to the government system. But they can't build that system in shipments to Qatar without us, it's a critical part of a process. So that one I think we described as kind of slipping sideways rather than kicking the can down the road just because it is the U.S. government and its based on pending projects. But I think there's a better line of sight on that one. Whether it's this quarter I don't think they can move that fast. But if they did, we have the products ready to go, but certainly over a short-term horizon, but the software did participate, yes.

Craig A. Ellis - B. Riley Caris, Research Division

And then, the second question is also fairly in near term. With respect to your end markets in the outlook, can you talk about some of the gives and takes with industrial communication infrastructure, networking? Is the assumption there that they're basically flattish or is there some growth in the portfolio sequentially? And has anything from what you see expected to decline sequentially?

Louis DiNardo

I think there's certainly growth. All of the end markets, and frankly, the geographies even I would expect growth. Networking, again we participate in networking not only with our compression.

[Audio Gap]

We sold almost the whole portfolio and let's say at this point that would be with the exception of iML products. So I think we will have a healthy second half of the year in networking. Undoubtedly, in my mind, we will have a healthy second half of the year in high-end Consumer. I think we have an opportunity to package sell some of the Exar products through a sales force that has very intimate relationships with major customers. We're not talking about the second or third Tier, whether it's Korea, Taiwan, or Mainland China, which is really an explosive growth market for iML. We can now move transceivers in with them, we can move bridges in. We can move some of our Power Management or Exar proper Power Management ICs. I think high-end Consumer's certainly a significant growth engine for us. Networking should be fine, comm infrastructure, it's a market that for us is about 11% of our business, will grow with the market. The products that we have are of $400 FPGAs, we tend to sell Power Management ICs and connective ICs again. We still do have our legacy sonic business, which is doing well, it's just holding on its own. It's kind of in a nice steady state. So we'll probably get a little growth. And then the industrial market, we just -- with 14,000 customers and with the introduction, even if I looked at the 60-part types that I referred to approximately 60 announcements. Even if I took out the stuff that is more centered around the high-end Consumer Business, the rest of the stuff is all great product introduction. It's finding its way into the industrial space. The power modules has been uptake, a low dropout regulator, there's been great uptake. We have the Stretch product line, which we still keep in the industrial space, surveillance, sometime in the not-too-distant future we're starting to sample our solution for the alternative transmission standard. So industrial is going to be healthy. If I had to force rank them, I'd say, high-end Consumer will probably grow the fastest, Networking and industrial line, on a percentage basis, probably about the same and Communications picking up the rear.

Craig A. Ellis - B. Riley Caris, Research Division

Okay. Thanks for that, Lou. And then switching gears to more of a higher-level question. I think you mentioned in response to Tim's question and in other remarks that there's some strategic mix out going on in the portfolio. Can you quantify the degree to which that's impacting the business in the outlook quarter and when do we see the peak amount of mix out. Is it in the September quarter or will it be a bigger factor in the future quarter? And if so, when would that be? And when does that really exit the model? When is that no longer a headwind?

Louis DiNardo

That's a really difficult question. And I'll give you a little bit of background first, as I try to compose an answer. Part of the challenge in this business, I mean, let's look at the low end of transceiver business. How many years ago, I left one of your Technology. 2 driver, 2 receivers, RS-232 chip, was $2. Now it's $0.35. What we're seeing at the same time and it just happens to be the environment. So and this is why I say I think we're being conservative on our guidance, but I think it's the appropriate thing to do. We are in a supply-constrained environment. Wafers are getting tougher to get, back-end capacity is getting tougher to get. All of those things as you get supply constrained in our industry, you guys know what happens, is people firm up pricing. So I don't think, TI will be as bloody. I don't think the competitive nature of, like our -- I shouldn't name names, the people in the transceiver business, you got Intersil, you got TI, you got Maxim and then you got China Inc. China Inc. will always be a price leader, but we play at different accounts. But if pricing firms up, then we won't walk away from the business. If it -- and this feels like it's firming up. So I'm kind of giving you a mixed answer to that. I don't know when, because this -- if the indications of their pricing is firming up and I'm looking at Parviz, because he's the guy that's going to be pulling the strings on that, yes, then we may enjoy the business for a little while longer, but we are -- certainly, as we go to the second half of the year, or into the first quarter of next year, we're going to be more selective about gross margin business that doesn't add any meaningful operating income.

Craig A. Ellis - B. Riley Caris, Research Division

And is there any one end market, Lou, where that's a particular focus, you use Communications as an example. Is it mostly in Communications where that's happening or is it fairly equally distributed across the portfolio?

Louis DiNardo

It's pretty evenly distributed because those transceiver sell into just about every piece of electronics you can think of.

Craig A. Ellis - B. Riley Caris, Research Division

Yes, and then my last question is related to something that you concluded with and it as it related to the target financial model. You indicated you thought it was something that investors could think about with an 18-month timeframe. Can you give us some milestones that you have on your radar screen that gets you there and where are you more confident and where are you less confident with the revenue milestones that take you to $70 million at the midpoint?

Louis DiNardo

Yes, I would be happy to, and I'm going to do this without putting hard numbers on it, we can't, because we don't forecast by product line, but I'm going to talk about the product lines. For us to achieve that model, I think one of the leading indicators for me, and again, I'll look towards Parviz on this is us getting traction in the Power Management business with differentiated products. That business can grow meaningfully for us and add, on a quarterly basis, a nice piece of that net that we have to get to, if you think about us in the near term get to $45 million, and so really we're looking for $25 million of incremental growth. I think we have the opportunity with really some very, very nice product introductions that have now been in the marketplace for 6 months or so. For our Power Management business to add meaningfully. I think our surveillance business, and then it's not a product because for us, it's an assembled product, and a lot of it's our own ICs in the assembled product. But our surveillance business has the opportunity to grow quite nicely. There's a literally tens of millions of cameras being deployed, we've got a new transmission standard, which just as both new camera deployment for high def as well as a really nice solution for doing retrofit. Connectivity, we've got, again, we've put money into R&D here between our own R&D budget and what we did through acquisition, these 60 products, they're world-class products. So when we look at, I don't remember the part number we had, internally, we use to call it Elwood, but it's a USB to Ethernet bridge. Those are the kinds of products. So Parviz, maybe you want comment a little bit about what you think your growth engines will be.

Parviz Ghaffaripour

As Lou, you mentioned, we have released a lot of new products in the last 3 quarters. And in the last 15 to 18 months, 60 products. That has given a lot of rejuvenation in the marketplace and branded us as a leading provider of differentiated products. And we already have seen a lot of the traction in the customers that have translated into revenue. So as you mentioned, the Power Management is the key area. And the nice thing about all of these in every product line we have introduced new products that are platform products and that can be customized to customers for many of the application. So in the Connectivity area, the transceivers, the Bridges, Power Management, Timing, which is a new area for us, higher ASP good [ph] margin, all of those we are seeing a lot of activity in. As you know, Lou, all of us have to make sure that we are successful in every area of our product lines, not only in one area.

Operator

Jon Tanwanteng with CJS Securities has the next question.

Jonathan Tanwanteng - CJS Securities, Inc.

Most of them are answered already. And I just want a little more detail on the iML business, and I know you're limited in what you want to and can say, if you could, what does a normal seasonality look like there?

Louis DiNardo

I'm not sure about the quarter-to-quarter seasonality. One would think that it's because it's high-end Consumer that you'd see bumps prior to the holiday season. I think traditionally or historically, the company was really, so heavily dominated with large screen TVs, large flat-panel TVs, that you really didn't see that bump as much. Now they build pretty much the same number of TVs every week, and I think that's why kind of week-to-week, or at least month-to-month basis, the company has been extremely linear. It's not what I would normally have expected in a consumer business. When I first -- when we took our first meeting and I saw a company that had -- just quoting a round number, I think, on a historic basis was $67 million in revenue, north of 50% gross margin. Running on $2.5 million of inventory and turning of 22% operating margin. I thought somebody made up the numbers. That doesn't sound like a consumer play, but that's because the product is so well-differentiated and really the brand has been built in the flat-panel display market. I think we will probably build more seasonality as we look towards what will be our probably fiscal '16, late fiscal '15 or early fiscal '16, because the -- and this also surprised me frankly that the PMIC, which I think we all know the PMIC business to be a pretty bloody market, it's pretty competitive. But the solutions that had been designed and developed by the iML team are outstanding. And while we certainly have this 1 large company, we all know that in the U.S., there's a whole bunch of other companies around the world. You're going to Mainland, China and there are some very, very large companies that are building tablets literally by the millions per week. And I think with that penetration, which we've already got, we've already experienced large orders and we've got great relationships, that business is likely to be far more seasonal. And when that creeps up with respect to the meaningful size of the revenue that comes out of the flat-panel TV market, I think I'm not going to forecast, but right now, I don't think there's a lot of seasonality. I think going forward, we'll probably be building more seasonality.

Jonathan Tanwanteng - CJS Securities, Inc.

Okay. Appreciate the details. And then just an update on Stretch and Cadeka, I know you've talked some on surveillance market, but if you could provide more detail on how well they've integrated in the opportunity for a product that the both of them are working on out there?

Louis DiNardo

Sure. Stretch has been integrated and now all of our system solution businesses were under Craig Lytle. I think that's been wonderful because these large chip developments, we just finished Panther II. Just defining something like Panther III can take a year. In the meantime, you have a workforce, particularly the hardware designers. The guys that have been doing RTL. They don't have a whole lot to do. So I think we do have the opportunity to take advantage of some synergies in the engineering workforce, as we've put both of these businesses under 1 leadership. One leadership with respect to engineering, as well as with respect to the general management of the business. So Parviz, on the other hand, picked up the HPA product line, the high-performance product line that came over from Cadeka. So again we're getting leverage out of just cycles of learning that are improving because we've got a whole bunch of really great engineers now all working together and going to the same new product meetings. So I think the integrations have gone quite well. The Stretch team is right here in the building. Bob Beachler has taken over as Vice President of Corporate Marketing, which we sorely needed. Maybe for the last 1.5 years, it wasn't an absolute necessity because -- until he start introducing world-class new products, spending money on advertising. Yesterday's news isn't necessarily a good use of funds. But with 60 new products out in the last 18 months or 15 months and looking forward to the next couple of months, that's a key role. So I think I poached him out from under Craig, he was the Vice President of Marketing at Stretch. So I think it's going well. Craig, do you want to comment on integration.

Craig Lytle

Yes, I think the integration of the Stretch team has gone quite well. So we've got some obvious benefits have come right away. First is our existing customer base has found new enthusiasm for looking at our existing products for new opportunities so we're chasing some of the new programs in existing customers. On top of that, the Exar sales force, much larger sales force than Stretch had, of course, has been great at finding new opportunities and are bringing a lot of new opportunities to the existing products. And as Lou pointed out, we now have an engineering team that we're using to define and develop new products that will allow us to go after this market in a bigger way. And surveillance market is still a very, very exciting market, very fast-growing, over 60 million cameras sold this calendar year and most analysts have that nearly doubling to well over $100 million cameras by 2018. And we want to be a big part of that market in a lot of different ways. So we are thrilled with the integration.

Jonathan Tanwanteng - CJS Securities, Inc.

Great. And then, Ryan, maybe one of you -- about $4 million of acquisition costs in the quarter, anything going into Q2 the September quarter? .

Ryan A. Benton

Yes, we'll still have legal fees and the like in the current quarter as we said, we closed the tender process however we still have some work that has to be done in order to, one, D List the company, and we just applied, we just applied to D List iML from the Taiwanese Stock Exchange yesterday or the day before. So there will be work to complete that and then the second debt merger involves some legal fees in the lack that will have to incur.

Jonathan Tanwanteng - CJS Securities, Inc.

Any idea what the magnitude might be?

Louis DiNardo

About a $1 million.

Operator

[Operator Instructions] We'll move on to Dan Scovel with Edison Research.

Dan K. Scovel - Edison Investment Research Limited

I was going to ask you on the seasonality with iML. But I got the jump on the gun there. The synergy in the consumer market, with the hopes that you can pull some of your traditional Exar stuff into a consumer space with iML. Is that something you think you can do within a year? Or is that really more of 1 year or 2 before you can capitalize on that?

Louis DiNardo

I think certainly within the year. I'm actually hoping for something more quick. A lot of these products we have their drop in replacements, for TI solutions, for Industrial Solutions, where you have a wide variety of suppliers, and we just, frankly, didn't have the relationships -- we do business with Samsung, but we do business with Samsung in other divisions. Finding us an opportunity for Power Management part, maybe it's a drop in replacement, we don't have the go through a whole design cycle, we just go through a qual cycle.

Ryan A. Benton

And I think, what. This is Ryan jumping in. I think seasonality is an important concept and is certainly is that within the legacy products. But I think if you spend time with the iML team, you'd get as excited as I'm about the new products and some of the customers that they've been able to acquire over the last couple of years. So you've got new products that are ramping that are in very high-growth markets like the LED, which Lou demonstrated. You've also got some new customers who are building large factories, ramping up in China and taking market share and we'll share in their success.

Louis DiNardo

Yes, I visited, I traveled with the Vice President of Sales from iML. And I stepped inside a building, that was 600 -- 6 million square feet under 1 roof. There is enormous cap capacity being built out. And look, I think, one final comment, and I don't think this is really just is a seasonality question or even your question about the pull through, but I think Ryan just touched on it, so I want to go back and emphasize. We have great solution for this LED lighting play, whether it's down light, lumineers or whether it's the replacement stream candescent bulbs and kind of none of that is really baked into our thinking about how we valued and frankly I thought we got a very, very nice value out of this deal. I mean, you look at the multiple of any number of sales, so look what we paid net, in net cash. This was a phenomenal transaction and we have a growth engine that we haven't been able to size yet, but we know it's the best mousetrap out there for certain segments of the market. And we've already seen customer traction.

Dan K. Scovel - Edison Investment Research Limited

Let me, I guess, flip that around. Obviously something like an LED market is a huge opportunity, of course, you did mention a few minutes ago about things getting a little tighter on the capacity side. I guess, are you comfortable in terms of mix, I mean, let's say, your LED stuff hits, are you going to be able to capitalize on that? Or is -- are there going to be some certain constraints given time and capabilities?

Ryan A. Benton

Yes, I think time will only tell. But we have, as a combined entity, we're a bigger company. We're far more important company to our vendors and that may not be the high word a bit for me on achieving scale, but it certainly an important part of what scale brings to us, is leverage with the vendors, relationships we have with vendors. So I think the combination of the operations team Exar getting closely coupled to the operations team at iML, using all of the leverage that we have. I think we'll be fine and we'll be able to capture a meaningful piece of the target market that we have for that lighting solution.

Operator

We have no further questions at this time. Mr. DiNardo, I'll turn the conference back to you for closing or additional remarks.

Louis DiNardo

No long-tailed remarks. We had a great quarter. It was a lot of hard work to get this transaction done, but I think if you really start to pencil out what the combined entity can deliver in the way of operating income and earnings per share, it's a highly accretive transaction over very -- it's accretive immediately, but over a very short period of time, it will be highly accretive. So we're happy to have the iML team on Board and we look forward to talking to you next quarter when we'll give you a little bit more detail about how the integration has gone. Thank you.

Operator

And again, ladies and gentlemen, that does conclude our conference for today. We thank you, all, for your participation.

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